Case Law Details
Aka Ausfuhrrkreditgesellschaft MBH Vs ACIT (ITAT Delhi)
Introduction: In a landmark ruling by the Income Tax Appellate Tribunal (ITAT) in Delhi, the case of Aka Ausfuhrrkreditgesellschaft MBH Vs Assistant Commissioner of Income Tax has redefined the tax implications of management fees associated with External Commercial Borrowings (ECB) within the framework of the India-Germany Double Taxation Avoidance Agreement (DTAA). The ITAT’s decision, pertinent to the Assessment Year 2016-17, brings to light the characterization of management fees as ‘interest’ under Section 2(28A) of the Income Tax Act, 1961, hence exempting it under Article 11 of the DTAA.
Detailed Analysis:
The crux of the dispute revolved around whether the management fee/processing fee received by Aka Ausfuhrrkreditgesellschaft MBH, a non-resident banking company and tax resident of Germany, in connection with the ECB loan granted to Indian entities, is taxable in India. The revenue authorities had initially treated such fees as Fees for Technical Services (FTS) under the provisions of Section 9(1)(vii) of the Act and Article 12 of the India-Germany DTAA, thereby making it taxable.
However, upon examination, the ITAT found that the assessee had advanced ECB loans to Indian entities, including M/s Filatex India Ltd., protected by Hermes Cover acting on behalf of the Federal Republic of Germany. The management/processing fee in question was part of the overall financial arrangement, akin to commitment and documentation fees, which the Assessing Officer had agreed were exempt under Article 11(3)(b) of the India-Germany Tax Treaty.
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